The provision for income taxes is based upon the Corporation’s annual income or loss before income taxes for each respective accounting period. The following table summarizes the Corporation’s provision for income taxes for the periods presented (dollars in millions):
A reconciliation of the U.S. statutory rate to the Corporation’s effective tax rate is as follows for the years ended December 31:
The effective tax rates in 2013 and 2014 are higher than the federal statutory rate largely as a result of the combined impact of state and local taxes and various non-deductible expenses.
The effective tax rate did not change significantly from 2013 to 2014. The increase in the non-deductible legal expenses relates to the legal settlement accruals recorded in 2014. See Note 6. This increase offsets almost entirely the favorable changes in the rate for the domestic production activities deduction, stock compensation, valuation allowance, and research and development credits.
The Corporation derives a current federal and state income tax benefit from the impact of deductions associated with the amortization of tax deductible goodwill acquired through business combinations. The tax basis of the Corporation’s tax deductible goodwill was approximately $128.5 million (as adjusted) and $145.3 million at December 31, 2013 and 2014, respectively.
F-29 2012 2013 2014 Current provision: Federal $ 11.6 $ 13.0 $ 10.4 State 1.5 1.3 1.3 Total 13.1 14.3 11.7 Deferred provision: Federal 1.4 4.8 (2.1 ) State 1.4 7.2 (0.2 ) Total 2.8 12.0 (2.3 )
Total provision for income taxes $ 15.9 $ 26.3 $ 9.4
2012 2013 2014
U.S. statutory rate applied to pretax income 35.0 % 35.0 % 35.0 %
Differential arising from:
State taxes 4.2 4.3 4.0
Non-deductible legal expenses - 14.8 31.3
Domestic Production Activities Deduction - (4.7 ) (10.4 )
Stock compensation - 2.6 -
Valuation allowances - 7.1 0.2
Research and development credits - - (5.6 )
Other 1.7 (0.9 ) 3.5
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11—INCOME TAXES (Continued)
The Corporation recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Corporation also recognizes as deferred tax assets, the future tax benefits from net operating and capital loss carryforwards. As of December 31, 2014, the Corporation has federal net operating loss carryforwards of $40.1 million ($14 million deferred tax asset). These net operating loss carryforwards resulted from the stock acquisitions the Corporation completed in 2013 and 2014. These net operating losses are subject to limitations under Internal Revenue Code Section 382; however, the Corporation expects that it will be able to use the recorded amount which takes into account the limitations of the carryforwards. Accordingly, the Corporation has not recorded any valuation allowance for the associated deferred tax asset. The deferred tax asset for state net operating loss carryforwards is $3.1 million, net of federal impact and valuation allowances. The state net operating losses have carryforward periods ranging from 1 to 20 years depending on the taxing jurisdiction.
As a result of a corporate restructuring that was implemented on January 1, 2014, separate company state taxable income was significantly reduced. This reduction in separate company state taxable income impacted the Corporation’s analysis of the realizability of separate company net operating loss carryforwards. A valuation allowance is provided for the Corporation’s deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based on the Corporation’s analysis of the impact of the corporate restructuring, a valuation allowance on the separate company state net operating loss carryforwards was recorded. The deferred tax asset for state net operating loss carryforwards totaled $3.2 million and $3.1 million at December 31, 2013 and 2014, respectively, net of valuation allowances of $4.1 million.
The Corporation recognized net deferred tax assets totaling $18.2 million and $30.6 million at December 31, 2013 and 2014, respectively, net of valuation allowances of $4.1 million.
Current deferred income taxes consisted of (dollars in millions):
Noncurrent deferred income taxes consisted of (dollars in millions):
As of December 31, 2013 and December 31, 2014, the Corporation had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax jurisdictions. There were no unrecognized tax benefits at December 31, 2014 that, if recognized, would affect the tax rate.
F-30
December 31, 2013 December 31, 2014 Assets Liabilities Assets Liabilities
Accrued expenses $ 9.6 $ - $ 7.7 $ -
Allowance for doubtful accounts 20.8 - 22.8 -
Net operating losses 1.0 - - -
Other 7.2 - 13.7 -
Valuation allowance (1.7 ) - (2.0 ) -
Total current deferred taxes $ 36.9 $ - $ 42.2 $ -
December 31, 2013 December 31, 2014 Assets Liabilities Assets Liabilities
Accelerated depreciation $ - $ 11.2 $ - $ 11.4
Stock-based compensation 4.8 - 4.6 -
Goodwill and intangibles - 25.4 - 33.0
Net operating losses 8.0 - 21.2 -
Other 7.5 - 9.1 -
Valuation allowances (2.4 ) - (2.1 ) -
Total noncurrent deferred taxes $ 17.9 $ 36.6 $ 32.8 $ 44.4
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11—INCOME TAXES (Continued)
It is the Corporation’s policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for income taxes. As of December 31, 2014, the Corporation had no accrued interest or penalties related to uncertain tax positions.
The federal statute of limitations remains open for tax years 2012 through 2013. The IRS completed its audit of the Corporation’s consolidated U.S. income tax returns for 2010 and 2011 in February 2014.
State tax jurisdictions generally have statutes of limitations ranging from three to five years. The Corporation is no longer subject to state and local income tax examinations by tax authorities for years before 2009. The state income tax impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification of IRS settlement to the states.
PHARMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)